[English Translation]

Interim Proposal on web3 Policy

December 2022

Liberal Democratic Party of Japan
Headquarters for the Promotion of Digital Society
web3 Project Team1

1. Introduction(1) “The strong weed endures the strong wind”
The era of what could be described as the “web3” craze reached a tipping
point in mid-2022. With crypto asset prices and NFT transaction values
falling in the wake of the U.S. interest rate hike, the crash of dollar-pegged
algorithmic stablecoins, and the collapse of major global crypto exchanges,
the crypto asset industry is entering a global winter period known as“Crypto Winter.”
It is undeniable that the various problems currently occurring could slow
the development of blockchain based web3 businesses. The declining valueof crypto assets and the prospect of future depreciation may reduce thecapacity and willingness of some investors to invest and could cause web3
projects to be called off or slow down. In addition, governance issues at someof the industry's leading firms could discourage the public from entering theweb3 space. The debate over tighter regulation in many countries may gain
momentum.
However, this harsh winter gale is also an opportunity to reexamine thetrue value of web3 and nurture the new seeds of innovation. As the saying
goes, “the strong weed endures the strong wind.”
In the past, the process of socially adopting new technologies has often
encountered many difficulties, including market turbulence and unfairness
due to underdeveloped markets and rules. Entrepreneurs who haveendured and overcome the public backlash arising from such scandals have
led to create many innovative next-generation businesses. As the crypto
industry is facing headwinds, we must reexamine the essence of thistechnology, refine our assessment for business investment, and accelerate
the development of the business environment to create a safe and secure
web3 ecosystem.
As a result of repeated large-scale hacking incidents in the past, Japanwas early in establishing regulations that focused on protecting consumers
and investors. We have been ahead of other countries in establishing a
registration system for cryptocurrency exchanges and a system forsafeguarding customer assets (e.g., 95% cold wallet regulation). We havesuccessfully limited the impact of recent global crypto exchange collapse
incidents on the domestic market.
While many other countries are standing still and shrugging theirshoulders in the face of the cold wind, Japan is positioned to play a uniquerole in the crypto industry because it has seen the industry suffer in the2past. This is an opportunity for Japan to vigorously promote thedevelopment of an internationally competitive web3 business environment
as a part of its national strategy, and to demonstrate leadership ininternational regulatory discussions, such as at the G7 summit in 2023.
Now is the time for the public and private sectors to gather their knowledge
and expertise to make Japan the global hub of “responsible innovation.”(2) Impact of web3 on economic and social innovations
Blockchain, the core technology of the web3 era, is rapidly expanding its
use cases beyond traditional crypto asset exchanges, accelerating thelaunch of innovative businesses and projects that leverage its
characteristics.
The development of blockchain technology enables digital assets andrights to be converted into units in the form of “tokens” that can be held andtraded by individuals in a format independent of any specific platform orsoftware. The quantitative and qualitative development of these digitalasset transactions, freed from geographical constraints, is also a technologythat paves the way for further cross-border and faster business transactions.
The transparent nature of the blockchain, in which all transactions arerecorded and made public, has characteristics that make it suitable forbuilding more open and decentralized governance. The flexibility of tokens,which can be customized through smart contracts, is expected to lead to newcollaborative mechanisms that incentivize non-economic activities such as
volunteerism and lower the barriers between management and workers.
For example, through the widespread use of stablecoin payments,
international remittances may become faster and cheaper, and sending
money to children studying abroad may become as easy as sending money
domestically. The blockchain's tamper-resistance could make it possible tomanage supply chains across multiple countries and regions moretransparently and efficiently. In trading carbon credits, the blockchain may
enable projects to more clearly link individual credits to CO2 reduction
projects. People who sympathize with rural community development
projects would be invited to contribute their skills and passions to suchprojects remotely, and efficiently receive non-monetary rewards for theirefforts.
It is impossible to predict exactly how the blockchain technology will be
used in ten or twenty years, just as it was difficult when the early Internet,
known as Web 1.0, appeared in the 1990s. In the short term, many projects
may turn out to be more efficient using traditional technologies than using
blockchains, and many projects may take years before becoming profitable.
However, as the new digital economy expands rapidly, there is no doubt that3

if we miss the wave of change brought by blockchain technology, it will
become a significant risk factor for Japan's economic growth.
In this year's “Basic Policy on Economic and Fiscal Management andReform,” the government clearly announced its intention to "develop thenecessary environment for the realization of a decentralized digital society"and to promote web3 policy as a national strategy. We must urgently resolve
the legal, tax, accounting, and other issues that have long been pointed out
as limiting factors for web3 innovation in Japan and improve ourinternational competitiveness in the growing new digital economy. We must
not miss this opportunity.
(3) The purpose of this Interim Proposal
In January 2022, the LDP's Headquarters for the Promotion of a DigitalSociety established the NFT Policy Study Project Team (PT), which released
the “NFT White Paper” in April of the same year. Since then, the Japanese
government's web3 policy has been formally positioned in the government's
economic policy, as outlined in the white paper. Web3-related teams andpolicy projects have been launched one after another in related ministries
and agencies, greatly accelerating the pace of the Japanese government's
web3 policy discussions.
The white paper focused on NFTs and positioned them as the “catalyst of
the Web 3.0 era,” and summarized the issues centered on NFTs. However,since NFTs are only a part of the web3 ecosystem, there were calls within
the party for a comprehensive examination of the entire web3 policy picture
as a growth strategy. Thus, the NFT Policy Review PT was reorganized in
October this year, and the “web3 Project Team” (PT) was established under
the Digital Society Promotion Council.
In this interim proposal, we have summarized the current direction of
discussions as interim proposals on particularly important themes, focusing
on the themes of the 10 PT meetings held since October (see Attachment 1).
A working group (Attachment 2) consisting of outside attorneys and otherswith a high level of expertise in the web3 business provided significant
assistance in the preparation of this document and writing of the document.
We will continue to study each of the points mentioned in this interim
proposal, as well as many other points that could not be included in thisdocument while listening to the opinions of related parties in Japan andabroad. We plan to compile our recommendations in the form of a white
paper by the spring of 2023.

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2. Outline of Proposals on Key Themes(1) Tax reform for a token financing friendly environment
A. Issue
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In the NFT White Paper, the following tax reforms appropriate for theblockchain economy were proposed: (1) Tokens continuously held by
the issuing corporation should be exempted from the year-end markto-market taxation for corporate income tax purposes. In addition, the
LDP's "Urgent Proposal on web3-related Taxation," dated November
10, 2022, proposed, in addition to (1), that (2) tokens issued by othercompanies and held by third parties that are not for short-term trading
purposes be excluded from year-end mark-to-market assessment.
As a result of these proposals, the LDP and Komeito's Outline of theTax Reform for FY2023 made some progress by proposing that (1)tokens continuously held by the issuing corporation be excluded fromthe year-end mark-to-market taxation for corporate tax purposes in
the FY2023 tax reform.
On the other hand, measure (2) to exempt tokens issued by otherparties, not for short-term trading purposes from year-end mark-tomarket taxation, was not included in the above outline and was
excluded from the FY2023 tax reform.
To promote the start-up of blockchain-related businesses in Japan, it
is necessary to create an environment that facilitates investment intokens. However, suppose a corporation holds "crypto assets for which
an active market exists" issued by another party. In that case, such
crypto assets will continue to be subject to year-end mark-to-market
taxation, and the corporation will incur a corporate tax burden on the
unrealized gains at the end of the fiscal year. As a result, domestic
investors in web3 businesses will be placed at a significant competitive
disadvantage compared to foreign investors who are subject to bookvalue assessment. This could be an obstacle to developing the web3
ecosystem in Japan.

B. ProposalFrom the perspective of supporting the development of the web3
business ecosystem, including support of startups and R&D ofblockchain, when holding tokens issued by other parties, such tokens
that are not for short-term trading purposes should be excluded fromthe year-end mark-to-market taxation, and, measures should be taken
to value such tokens at their acquisition cost. This tax reform, together
with the measure to exclude tokens continuously held by the issuing
corporation from year-end mark-to-market taxation, which was5

proposed in the Outline of the Tax Reform Proposal for FY2023, isessential for developing the web3 ecosystem in Japan and should be
implemented promptly.
In terms of accounting, crypto assets issued by other parties are
currently subject to mark-to-market valuation if "an active market
exists for the assets," regardless of the purpose for which the assets
are held. Accordingly, if the above measure is taken, the rules between
tax law and accounting will not be consistent. However, theinconsistency between tax law and accounting rules can be seen inother situations as well. Even if the tax law and accounting rules areinconsistent with respect to the year-end mark-to-market taxation of
crypto assets, no major practical problems are expected to arise. In
addition, the purpose for holding tokens have become more diverse
compared to when the accounting rules for the year-end mark-tomarket assessment of crypto assets were introduced. For example,
tokens are often held primarily for governance purposes. In
consideration of these new purposes, it is the accounting rules thatshould be revised, which subject crypto assets for which an active
market exists to the mark-to-market assessment regardless of the
purpose for which the assets are held.

(2) Revision of income taxation on crypto assets held by individuals
A. IssueThe taxation of crypto asset transactions by individuals in Japan ismore severe than in many other countries, with income from crypto
asset transactions being taxed as miscellaneous income at a maximum
rate of 55% (income tax and inhabitant tax combined). As a result,
there has been an increase in the outflow of taxpayers overseas.
In addition, under the current tax system, income tax is imposed on
gains or losses related to the transfer of crypto assets not only when
crypto assets held are exchanged for legal tender such as yen or dollars
but also when they are exchanged for other crypto assets as if thecrypto assets were sold. However, since no legal tender is acquired
when crypto assets are exchanged for each other, this has impeded tax
reporting by taxpayers.
In the NFT White Paper, we proposed that the taxation of crypto assets
should be examined in terms of income taxation on users, including (1)making gains and losses arising from transactions of crypto assets
conducted by individuals subject to separate taxation for tax reportingat a 20% tax rate. Furthermore, the LDP's Headquarters for the
Promotion of Digital Society, in its "Urgent Proposal on web3-related
Taxation" dated November 10, 2022, proposed that, in addition to (1),(2) gains and losses from the exchange of crypto assets should be6

exempt from taxation.
Neither of the above amendments was included in the LDP and
Komeito's Outline of the Tax Reform for FY2023, which means thatthey are excluded from the FY2023 tax reform.

B. ProposalWith regards to the taxation of crypto assets held by individuals,consideration should be given to (1) subjecting gains and losses arisingfrom transactions in crypto assets to separate taxation for tax
reporting at a rate of 20%, (2) allowing losses on crypto assets to be
carried forward (for three years from the following year), and (3)making crypto asset derivatives transactions subject to the same
taxation (i.e., separate taxation for tax reporting).
In addition, it should be considered that gains or losses on crypto asset
transactions should not be taxed when crypto assets are exchanged
but should be taxed collectively when crypto assets are converted tolegal tender.
In considering the above, it is necessary to compare the tax treatmentof crypto asset transactions by individuals in other countries. It is also
necessary to consider how the above treatment would affect taxpayers'
tax reporting and the tax revenues of the state.

(3) Ensuring crypto businesses access to receive accounting audits
A. IssueIn response to the many cases where crypto related businesses havebeen unable to obtain accounting audits, the NFT White Paper
proposed that accounting standards should be clarified and thatcertified public accountants and auditing firms should be encouraged
to conduct accounting audits.
Although some major audit firms have recently started to conduct
web3 business audits, there is still a noticeable delay in thedevelopment of accounting and auditing standards for web3-relatedcompanies that issue or hold crypto assets, and businesses are stillconcerned about the lack of access to accounting audits by certified
public accountants and audit firms. This is a severe obstacle to thesound development of crypto assets and NFT-related businesses inJapan, and by extension, to the proper development of web3 in Japan.

B. ProposalFirst, regarding accounting treatment and accounting standards, the
Accounting Standards Board of Japan (ASBJ) released the "Tentative
Treatment of Accounting for Crypto Currencies under the Payment
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Service Act" in March 2018. Still, there are delays compared to othercountries. For example, self-issued tokens are not covered, and thecommittee needs to catch up with other countries in the developmentof the system. In March 2022, the Committee published the"Discussion Paper on the Accounting for the Issuance and Holding of
ICO Tokens that Fall under the category of Crypto-assets under the
Payment Services Act or the category of Electronically Recorded
Transferable Rights under the Financial Instruments and ExchangeAct" and it is necessary to urgently develop accounting treatment,
accounting standards and guidelines based on this discussion paper.
Next, in terms of audit practice, although there are some cases whereauditing services have been commissioned, in other cases they are still
many refusals reported for crypto asset businesses, and there is adelay in the development of the audit practice system compared toother countries. It is said that the reason for the lack of progress incommissioning audits lies in the need for more communication
between audit firms and web3-related companies. In other words,
audit firms believe that the web3-related companies still need todevelop their internal controls and governance systems, which are thepreconditions for commissioning an audit, while web3-relatedcompanies are concerned about the lack of experience of the audit
firms. Therefore, it is necessary to promptly implement measures topromote candid communication through a public-private partnershipamong related ministries and agencies, The Japanese Institute ofCertified Public Accountants (JICPA), and private industry
organizations.
We expect that the JICPA, with the participation of relevant ministries
and agencies as observers, will establish a study group to share
information and hold discussions among web3-related companies andcrypto asset-related industry associations, and will advance its efforts
such as the formulation of necessary guidelines.

(4) Reinforcement of the token screening process at JVCEA
A. Issue

Before a crypto asset exchange can add a token to its listing portfolio,
it must undergo a prior review by the Japan Virtual and Crypto assets
Exchange Association (JVCEA), of which all crypto asset exchange
service providers are members 1 . The NFT White Paper proposed
streamlining the JVCEA's pre-screening process, based on therecognition that the lengthy time required for such a process is an

Although the legal requirement is prior notification (Article 63-6, Paragraph 1 of the
Payment Service Act), the JVCEA's self-regulatory rules require prior examination ofeach new crypto asset at the JVCEA.
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obstacle to the development of the web3 business in Japan. Since then,the JVCEA has implemented certain improvement measures,
including the introduction of the "Green List System,”2 and the timerequired for examination, especially for tokens already traded inJapan, has tended to decrease significantly.
On the other hand, the listing of new tokens issued outside of Japanremains slow. In addition, IEOs (Initial Exchange Offerings) involving
new offerings of tokens that have never been circulated before stilltake a long time for review, and there are currently only a limited
number of examples of successful IEOs in Japan. Furthermore, in lightof the recent bankruptcies of token issuers, there is room for further
consideration regarding the sufficiency of disclosure in the “summary
explanation” document of tokens, even for tokens that are alreadylisted.
Efficient and appropriate screening of tokens is an infrastructure thatwill enhance the credibility of crypto asset transactions in Japan andserve as the basis for the promotion of the web3 business, so the
JVCEA's screening system must be strengthened in terms of its
procedures and organization.

B. ProposalProposal 1: Increased transparency of JVCEA’s screening processesTo improve the efficiency of screening under the JVCEA, it is essential
to make the screening procedures more specific and transparent. For
token issuers and crypto asset exchange service providers to efficiently
present the information necessary for JVCEA’s examination and for
crypto asset exchange service providers themselves to proactively
cooperate in the examination, the JVCEA should specify theexamination items for the token examination and make them public,or at least make them available to crypto asset exchange service
providers. The examination items should be specified in a manner
appropriate to the context of the token, such as in the case of IEOs or
tokens circulating only outside Japan.
The FSA has already set forth criteria for judging the appropriatenessof crypto assets to be handled in its guidelines, but these criteria
remain qualitative. Therefore, the authorities should provide the
JVCEA with information on the thinking behind the guidelines and

Crypto assets that meet the conditions that at least six months have passed since a
crypto asset exchange service provider first started handling them and that three ormore crypto asset exchange service providers are already handling them are designatedas "Green List" issues. The Green List is a system that allows crypto asset exchange
service providers to begin handling crypto assets without prior screening by the JCVEA,
as long as they conduct appropriate screening on their own.
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opportunities for consultation as appropriate and cooperate with the
JVCEA in making the examination items more specific, thereby
allowing more efficient examinations.


Proposal 2: Strengthening JVCEA’s organization and capabilities

To promote further efficiency of token examinations at the JVCEA, thenecessary examination resources should be strengthened by steadily
increasing the examination staff with sufficient capabilities andknowledge.
At the same time, the JVCEA is expected to continue and advanceefforts to improve the transparency of its organizational management
and strengthen its governance system in line with the importance ofthe roles and responsibilities expected of the JVCEA. Specifically, the
JVCEA should consider taking steps to strengthen its system, such as
the specific establishment of a mechanism to ensure the neutrality andobjectivity of the token examination process, clarification of
information management rules regarding the examination, andimprovement of transparency, including disclosure rules regarding theresults of the examination.
Based on its supervisory authority over the JVCEA, the FSA should
provide guidance and advice, etc., to promote these efforts.

(5) Introducing legislation for LLC-type DAOs
A. IssueThe NFT White Paper recommended that the legal status of DAOs
(Decentralized Autonomous Organizations) operated autonomously bytoken holders based on codes, etc. recorded in distributed ledgers suchas blockchains, etc., under Japanese law, the content of legal rights
and obligations of members, taxation, etc., be promptly clarified, andthat the creation of a system that allows DAOs to be incorporated
should be considered as soon as possible.
In recent years, there has been an increase in the number of examples
of DAOs being used or being considered for use in Japan, such as forregional development, resolution of social issues, and community
management, and these examples have great potential from theperspective of revitalizing the Japanese economy and local
communities.
However, under current law, there is no clearly defined legal entity or
partnership form that ensures the limited liability of DAO members
and the flexible establishment and operation of DAOs. There are cases
where limited liability of DAO members is recognized in someinstances based on the "unincorporated association (Kenri-nouryoku
Naki Shadan)," a legal doctrine recognized in judicial precedents and10

academic theories. However, the treatment of such legal doctrine whenapplied to DAOs remains to be seen because the doctrine is not basedon formal legislation.
Therefore, there is a growing need to clarify the legal status of DAOs
under Japanese law.

B. Proposal
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When considering the granting of legal personality to DAOs, among
the various existing legal entity forms, a limited liability company(Godo Kaisha), which is based on the premise of unity of ownershipand management, and in which the autonomy based on the articles ofincorporation is relatively widely recognized, has a relatively highaffinity with the nature of DAOs.3
Therefore, a reasonable approach would be to first introduce a special
law for LLC-type DAOs, applying the regulations on limited liability
companies under the Companies Act and the regulations on
membership tokens under the Financial Instruments and ExchangeAct, with some modifications. From the viewpoint of prompt
introduction of the law, enacting the law through legislation by Diet
members should also be considered.
Specifically, for example, some rules for limited liability companies,
such as the fact that the names and addresses of the members of alimited liability company are matters to be stated in the articles ofincorporation, are not suitable for the flexible establishment andoperation of DAOs, and thus should be changed in accordance with thecharacteristics of DAOs.
The legislation of LLC-type DAOs is intended to increase the options
for establishing DAOs and not to deny the establishment and activities
of DAOs under other legal forms. Even in cases where an LLC-type
DAO is selected, this should not preclude the DAO from issuing tokens
other than membership tokens that represent the membership of alimited liability company.

(6) Promoting issuance and circulation of permissionless stablecoins
A. Issue

To promote digital asset trading, metaverse, and other web3 industries
in which Japan can demonstrate its international competitiveness, itis necessary to create an environment in which "permissionless"stablecoins, can be used safely and openly 4 . That is because

The same observation is reported in the interim report of the commissioned study on
DAOs and consumer protection by the Web 3.0 Study Group of the Digital Agency.
4 There are two main types of blockchains where stablecoins are issued and circulated:
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permissionless stablecoins are already widely circulated in the world
and are suitable means of payment in these fields.
Considering this situation, the June 2022 amendment to the Payment
Service Act officially defined stablecoin as an "electronic payment
instrument". It established a new regulated business category of"intermediary of electronic payment instruments" to enable theintermediation of stablecoin.
However, essential aspects of the regulations for a permissionlessstablecoin, such as the details of the regulations that intermediary ofelectronic payment instruments must comply with, will be defined ina government ordinance and related guidelines that are currently
being drafted, and the details of these regulations are currently underreview by the Financial Services Agency. Therefore, it is crucial todevelop these subordinate regulations and guidelines so that an
appropriate regulatory framework can be established to promote the
distribution and circulation of permissionless stablecoins.

B. ProposalProposal 1: Permissionless stablecoins based on foreign currencyWhen introducing permissionless stablecoins to Japan based on
foreign currency, which are already circulating overseas, theregulators should discuss with the industry how to reasonably
regulate stablecoins so as not to impede payment practices from theperspective of both promoting their circulation and protecting users
and taking AML/CFT into consideration.
First, it is necessary to adopt measures to ensure adequate protectionof domestic users in the event of the bankruptcy of a foreign issuer ordomestic intermediary, and a regulatory framework should be adopted
that allows domestic intermediaries, such as intermediaries ofelectronic payment instruments, to handle foreign currencydenominated stablecoins without undue burden. For example,
requiring companies to hold reserves equivalent to the total amount of
stablecoins in domestic circulation, including those held in unhosted
wallets, would make it difficult for domestic intermediaries to operatepermissionless blockchains and permissioned blockchains. The former is an open anddecentralized system that allows anyone to participate in transactions and theirverification on the blockchain without the existence of an entity that manages andoperates the blockchain. The latter is a centralized system in which there is an entity (aspecific company or group) that manages and operates the blockchain, and only thoseauthorized by the entity can participate in transactions on the blockchain or its
verification. The former is mainly used as the basis for the issuance and distribution of
crypto assets, stablecoins, and NFTs, while the latter is mainly used as the basis for
digital securities, trade transactions and their settlement, and authentication in logistics.
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as a viable business, so a realistic measure that works as a business isrequired.
In addition, since there are no clear rules under current law regardingwhether legal rights are definitively transferred when permissionlessstablecoins are transferred on the blockchain, it is necessary to clarify
the rules for transferring rights to secure transactions.
Furthermore, assuming that anyone can hold and use permissionlessstablecoins in wallets that they manage (i.e. unhosted wallets),intermediaries must ensure AML/CFT through the use of blockchain
analysis tools, etc.

Proposal 2: Japanese Yen based permissionless stablecoins

For Japan's web3 business to become internationally competitive, it isdesirable that not only foreign currency-denominated stable coins but
also yen-denominated permissionless stable coins be issued anddistributed as soon as possible.
Therefore, domestic financial institutions and industry associations
should promote the study of business models to make yen-pegged
stable coins a viable business. The government should support such
efforts and promptly sort out and resolve the remaining issues underregulatory law, as described above.

(7) Measures against unlicensed NFTs, and consumer protection
A. Issue

There are still many cases, mainly in foreign countries, of unlicensed
NFTs being issued and sold by parties other than content holders(rights holders). Since NFTs issued by genuine rights holders havemore value than pirated content in general, there are concerns about
the occurrence and expansion of consumer damage due to the
distribution of unlicensed NFTs. However, it is extremely difficult tocompletely prevent the issuance and sale of such unlicensed NFTs, as
has been the case in the past measures against content piracy.
In dealing with unlicensed NFTs, proactive action by rights holders is
required in terms of both requesting trading platforms to remove themand promoting the distribution of genuine NFTs. However, it isdifficult for each rights holder to implement this efficiently on its own.
In addition, although there are some test cases to demonstrate that an
NFT is genuine, there is no established methodology in practice at thispoint, and there are certain limits to the dissemination and educationof such information to consumers.

B. Proposal

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There are several government and private-sector-led efforts topreclude unlicensed NFTs, including the trial to file a request for
deletion to overseas trading platforms experimented in the research
project of a METI, and the project performed by the Japan Content
Blockchain Initiative (JCBI). The government should continue toadvance and support these initiatives.
In addition, to ensure the removal of unlicensed NFTs by NFT trading
platforms, it would be effective to demonstrate that such requests arebacked by the government and made as industry-wide requests. In
addition, it is necessary that such approaches to trading platforms will
be taken continuously.
One way to demonstrate that such requests are backed by the supportof the relevant ministries and agencies is to strengthen thegovernment's disseminating of information in English. The contents
and reports of individual test cases and projects, as described above,should be translated into English. In addition, given that persistentefforts are required in the process until an efficient cycle of reporting
and removal is realized, direct support with a certain amount of publicfunds may be provided not only for a single year but continuously tosupport such initiatives.

(8) Clarifying gambling regulations and revenue distribution in NFT
businesses
A. Issue

In other countries, while the use of NFT in NFT games (so-called
GameFi) and sports is growing, fantasy sports services using NFTs are
rapidly developing especially in the sports market5.
The NFT White Paper states that since it is not clear whether
gambling regulations are applicable to services that combine random
sales of NFTs and secondary distribution markets, which havedeveloped rapidly in Europe and the U.S., it is expected that guidelines
will be established for operators and that rules will be established toappropriately return revenue from the secondary distribution of NFTs
that use the likenesses of athletes, actors, artists, and otherperformers to them. Based on these proposals, the Council for Sports
Ecosystem Promotion formulated and published guidelines on
September 20, 2022, based on the results of discussions with relevant
ministries, agencies, and sports organizations, etc.

For example, a service in which digital cards featuring the likenesses of athletes areconverted into NFTs and users purchase such NFTs by using crypto assets or othermeans has become popular. In this service, the NFTs acquired by the user are granted
the right to participate in fantasy sports tournaments free of charge, with cash prizes
awarded to the participants with the best results.
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On the other hand, there are concerns that the development of fantasy
sports services in Japan utilizing NFTs like those in Europe and the
U.S. may fall under the Japanese gambling regulations, and sports
organizations and businesses are cautious about providing the same
type of services. As a result, the development of certain web3 projects
in the Japanese sports market has been hindered.
In addition, there is a concern that if a Japanese sports organization
licenses the use of its players' portraits, etc., to a Western operator
that develops fantasy sports using NFTs, the licensing by the sports
organization may be found to constitute an offence of aiding agambling crime. Therefore, there is concern that Japanese sports
organizations will not be able to participate in the rapidly expanding
fantasy sports market using NFTs in Europe and the U.S.

B. ProposalProposal 1: Organize and establish guidelines regarding the legalityof the business, etc.

Because similar business models for fantasy sports services using NFT
are already rapidly developing in Europe and the U.S., the public andprivate sectors should work together to sort out the legality ofgambling crime and the crime of running a gambling place for the
purpose of gain, and then develop guidelines to show that certain typesof businesses can be legally operated.
Furthermore, a vast market has emerged in the U.S. and elsewhere
for a business model that provides prize money from user participation
fees. This is the foundation upon which fantasy sports utilizing NFTs
have rapidly developed in the U.S. and Europe. To sustainably develop
the NFT-based fantasy sports market in Japan, the public and private
sectors should work together to examine whether a similar businessmodel is feasible in Japan.

Proposal 2: Establishment of guidelines on legal methods of profit
distribution, etc.

To realize the returns from the fantasy sports market using NFTs,
which is rapidly expanding in Europe and the U.S., relevant ministries
and industry associations must work together to establish guidelines,
etc., and to present sports organizations and operators with legal
methods of returning revenue through licensing, etc.
In addition, the sale of data by Japanese sports organizations tooverseas sports betting service providers also shares some legal issues
with the returns from the fantasy sports market using overseas NFTs,
the public and private sectors should cooperate to resolve these issues

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in a unified manner.
To achieve these goals, measures to prevent the "free-riding" ofJapanese content from other countries should be quickly implemented.
This should serve as a foothold for further developing the Japanesecontent industry in the web3 era.

Proposal 3: Establish rules, including the development of a model forthe returns from secondary distribution

There continue to be doubts about receiving revenue from thesecondary distribution of NFTs that use the portraits of players andperformers, especially in cases where the player transfers to adifferent team or retires. Therefore, it is necessary for relatedorganizations, relevant ministries and agencies, and industry
associations to work together to urgently develop rules, including theformulation of appropriate revenue return models.

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3. Other Points Requiring Consideration
In addition to the issues discussed in section 2 above, the web3PT willcontinue to study and follow up on the following themes proposed in the NFT
White Paper, as well as other critical issues related to web3, while inviting
the voices of those involved.


Establishment of a system to formulate and promote national strategies
for the Web 3.0 era: Is it possible to establish a "one stop consultationdesk" to seek solutions to promote innovation in cooperation with the
public and private sectors?



Establish an environment for crypto asset settlement on NFT platforms:
Is it possible for the FSA to provide interpretive guidance, such as byspecifying in guidelines or other means that the management of crypto
assets using escrow services is permissible under certain conditions?



The legal position of banks in NFT related business: Is it possible for the
FSA to guide the legal status of NFT-related business by banks (e.g.,
relationship with the scope of business regulations), such as by providing
certain examples?

Design protection in the digital space: While sorting out the limitations ofmeasures under laws such as the Copyright Act and the Unfair
Competition Prevention Act, the possibility of certain measures throughthe amendment of design rights should be considered in the future.

Clarification of rules regarding royalties during secondary distribution: Is
it possible to alert content holders to the limitations of royalty collection
so that they can correctly understand the current situation? In addition,measures to realize cross-sectoral royalty collection under public-private
partnerships should be considered.

Promotion of understanding among content holders: Is it possible toestablish information sessions and consultation desk services for content
holders in the industry regarding the rights acquired by NFT holders, etc.,
and to create model terms for content licenses?
17

Secure content data not stored on the blockchain: Is it possible to establish
rules through guidelines for explanatory items by industry associations
regarding the risk of losing content data represented by NFTs? In the
future, the use of data storage mechanisms that do not depend on specificentities should be considered.

Diversification of investment vehicles and schemes for blockchain related
businesses: Is it possible to allow investment in businesses that acquireand hold crypto assets and tokens by investment limited partnerships
through amendment or clarification of the interpretation of the Limited
Partnership Act for Investment? The possibility of investment inblockchain-related businesses by the public-private partnership fund andothers should also be considered.



Develop and secure entrepreneurs and engineers skilled in the blockchain
technology: As a measure to encourage overseas human resources whowill pioneer the web3 era to move to Japan, is it possible for thegovernment to hold and support international conferences inviting
overseas talents and issue a special visa (crypto-VISA) for personnel witha certain level of knowledge and skills in businesses related to crypto
assets.

Consideration of introduction of measures such as mandatory
identification, etc., to prevent money laundering: Considering the risk ofmoney laundering and terrorism financing (ML/TF) using NFTs,
necessary and effective ML/TF prevention should be considered frommultiple perspectives in cooperation with the public and private sectors,
while also taking into consideration the balance with the promotion of
innovation.

Regulation of NFT transfers to countries/regions subject to economic
sanctions: Is it possible for the public and private sectors to consult witheach other to spread awareness among the public that even NFT
transactions could be subject to the authorization under Foreign
Exchange Law in certain cases? This issue should be considered from18

multiple perspectives throughinternational cooperation.

public-private

consultationsand

Issuance of CBDC and its impact on the web3: As each country is
considering the issuance of Central Bank Digital Currency (CBDC),
consideration should be given to the impact of future issuance of CBDC
on the web3 ecosystem, including Stablecoin.

Trust using the Social Security and Tax Number System: The possibilityof a trust guarantee mechanism using the Social Security and Tax
Number System should be considered to identify individuals for antimoney laundering and web3 services.
End of Paper

19

Attachment 1
web3PT Interview Schedule
Date

Theme

Interviewee

On the Evolving Web3 World
October 12

and National Strategies

・Digital Garage, Inc.
Director and Co-Founder Joichi Ito
・Mori Hamada & Matsumoto(Wed)

Masakazu Masujima, Attorney at law
・Japan Blockchain Association (JBA)

About the web3 Tax System

・Japan Crypto Asset BusinessFriday,Association (JCBA)

October 21

・Japan Association of New Economy

Content Strategy in the web3

・Japan Content Blockchain Initiative

Wednesday, Era(JCBI)

October 26

・DENTSU Inc.

Solution Creation

Future Insight Department
Wednesday,

・Next Commons Lab

DAO Legislation

・Nagashima Ohno & Tsunematsu

November 2

Keiji Tonomura, Attorney at Law
Urgent proposal (draft) on

November10－

web3-related taxation

・Japan Association of New Economy

Audit of Token Business6

・The Japanese Institute of Certified(Thursday)

Public Accountants
Wednesday, The Situation Concerning FTX・Financial Services Agency (FSA)

November
16

6

Joint Meeting of the Digital Society Promotion Headquarters and web3PT
20

Date

Theme

Interviewee

Friday,Issues and Current Status of・HashPort Inc.

NovemberToken Auditing

・Japan Virtual and Crypto assets

18
November

Exchange Association (JVCEA)
・Japan Professional Football League (JSports Business and web3

24

League)・Council for Sports Ecosystem Promotion(Thursday)
Friday,December 2

December 7

Social Impact and the Web3

・Panasonic Holdings Corporation

World・World Scan Project, Inc.

Stablecoin and Financial

・Mitsubishi UFJ Trust and Banking

Services in the Web3 Era

Corporation
・Japan Crypto Asset Business(Wed.)

Association (JCBA)
・Financial Services Agency (FSA)21

Attachment 2

web3 Project Team Working Group

Name

OfficeHironori Inagaki, Attorney at Law

Nishimura & Asahi

Tsutomu Endo, Attorney at Law

Nagashima Ohno & Tsunematsu

Ken Kawai, Attorney at Law

Anderson Mori & Tomotsune

Keiji Tonomura, Attorney at Law

Nagashima Ohno & Tsunematsu

Kaku Hirao, Attorney at Law

Nishimura & Asahi

Masafumi Masuda, Attorney at Law

Mori Hamada & Matsumoto

Ryo Matsukura, Attorney at Law（Working Group Office）

Masataka Asahi, Attorney at Law（Working Group Office）

Jun Mukoyama（Working Group Office）

22